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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the quarter ended September 30, 2003ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the transition period from  toCommission file number 1-10877


TERRA NITROGEN COMPANY, L.P.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
    
    73-1389684
(I.R.S. Employer Identification No.)Terra Centre
PO Box 6000, 600 Fourth Street
Sioux City, Iowa
(Address of principal executive office)
    
    51102-6000
(Zip Code)


Registrants telephone number:
(712) 277-1340

At the close of business on October 31, 2003, there were 18,501,576 Common
Units
outstanding.

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
XYesNo

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)YesXNo



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|                                                                 |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                                   
|                                                                 | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                                                                 | CONDENSED CONSOLIDATED BALANCE SHEETS                                                        
|                                                                 | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                                              
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                 
|                                                                 | CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS CAPITAL                                       
|Notes to Condensed Consolidated Financial Statements (Unaudited)
|                                                                 | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                                 | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                                                 | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II. OTHER INFORMATION                                      
|                                                                 | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURE                                                       
|Certification of Chief Executive Officer                        
|Certification of Chief Financial Officer                        
|Section 906 Certification                                       



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PART I. FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




TERRA NITROGEN COMPANY, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

September 30,
    
    
    December 31,
    
    
    September 30,2003
    
    
    2002
    
    
    2002ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,281
    
    
    $
    35,738
    
    
    $
    14,462Accounts receivable
    
    
    22,398
    
    
    
    26,760
    
    
    
    27,090Inventory  finished products
    
    
    15,478
    
    
    
    10,411
    
    
    
    8,739Inventory  materials and supplies
    
    
    6,541
    
    
    
    9,692
    
    
    
    9,777Prepaid expenses and other current assets
    
    
    2,271
    
    
    
    6,659
    
    
    
    9,491Total current assets
    
    
    48,969
    
    
    
    89,260
    
    
    
    69,559Net property, plant and equipment
    
    
    86,918
    
    
    
    126,056
    
    
    
    127,800Other assets
    
    
    10,390
    
    
    
    10,708
    
    
    
    7,696Total assets
    
    $
    146,277
    
    
    $
    226,024
    
    
    $
    205,055LIABILITIES AND PARTNERS CAPITALCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    13,847
    
    
    $
    21,520
    
    
    $
    12,721Customer prepayments
    
    
    14,166
    
    
    
    21,314
    
    
    
    3,946Current portion of long-term debt and
capital lease obligations
    
    
    56
    
    
    
    53
    
    
    
    53Total current liabilities
    
    
    28,069
    
    
    
    42,887
    
    
    
    16,720Long-term debt and capital lease obligations
    
    
    8,290
    
    
    
    8,333
    
    
    
    8,347Long-term payable to affiliates
    
    
    4,114
    
    
    
    5,316
    
    
    
    5,316Other long-term liabilities
    
    
    1,600
    
    
    
    
    
    
    
    Partners capital
    
    
    104,204
    
    
    
    169,488
    
    
    
    174,672Total liabilities and partners capital
    
    $
    146,277
    
    
    $
    226,024
    
    
    $
    205,055


See Accompanying Notes to the Condensed Consolidated Financial Statements.

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TERRA NITROGEN COMPANY, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit amounts)(unaudited)

Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2003
    
    
    2002
    
    
    2003
    
    
    2002Revenues
    
    $
    86,202
    
    
    $
    76,001
    
    
    $
    275,033
    
    
    $
    237,639Other income
    
    
    223
    
    
    
    163
    
    
    
    477
    
    
    
    818Total revenues
    
    
    86,425
    
    
    
    76,164
    
    
    
    275,510
    
    
    
    238,457Cost of goods sold
    
    
    84,865
    
    
    
    71,595
    
    
    
    280,716
    
    
    
    223,859Gross profit (loss)
    
    
    1,560
    
    
    
    4,569
    
    
    
    (5,206
    )
    
    
    14,598Operating expenses
    
    
    2,330
    
    
    
    2,598
    
    
    
    6,824
    
    
    
    7,242Impairment of long-lived assets
    
    
    
    
    
    
    
    
    
    
    40,655
    
    
    
    Operating income (loss)
    
    
    (770
    )
    
    
    1,971
    
    
    
    (52,685
    )
    
    
    7,356Interest expense
    
    
    (198
    )
    
    
    (8
    )
    
    
    (204
    )
    
    
    (135
    )Interest income
    
    
    9
    
    
    
    47
    
    
    
    81
    
    
    
    51Net income (loss)
    
    $
    (959
    )
    
    $
    2,010
    
    
    $
    (52,808
    )
    
    $
    7,272Net
income (loss) allocable to
limited partners interest
    
    $
    (940
    )
    
    $
    1,971
    
    
    $
    (51,752
    )
    
    $
    7,127Net
income (loss) per limited
partnership unit
    
    $
    (0.05
    )
    
    $
    0.11
    
    
    $
    (2.80
    )
    
    $
    0.39


See Accompanying Notes to the Condensed Consolidated Financial Statements.

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TERRA NITROGEN COMPANY, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)(unaudited)

Six Months EndedSeptember 30,2003
    
    
    2002Operating activities:Net income (loss) from operations
    
    $
    (52,808
    )
    
    $
    7,272Adjustments to reconcile net income to net cash
flows from operating activities:Impairment of long-lived assets
    
    
    40,655
    
    
    
    Depreciation and amortization
    
    
    9,207
    
    
    
    9,824Changes in operating assets and liabilities:Receivables
    
    
    4,362
    
    
    
    5,221Inventories
    
    
    (6,112
    )
    
    
    9,904Prepaid expenses
    
    
    4,388
    
    
    
    (1,876
    )Accounts payable, accrued liabilities and
customer prepayments
    
    
    (22,579
    )
    
    
    1,559Change in other assets
    
    
    (2,846
    )
    
    
    1,706Net cash flows from operating activities
    
    
    (25,733
    )
    
    
    33,610Net cash flows from investing activities:Capital expenditures
    
    
    (1,763
    )
    
    
    (1,289
    )Financing activities:Net changes in short-term borrowings
    
    
    
    
    
    
    (14,293
    )Issuance (repayment) of long-term debt
and capital lease obligations
    
    
    (1,241
    )
    
    
    200Partnership distributions paid 4,720)
    
    
    (3,776
    )Net cash flows from financing activities
    
    
    (5,961
    )
    
    
    (17,869
    )Net increase (decrease) in cash and cash equivalents
    
    
    (33,457
    )
    
    
    14,452Cash and cash equivalents at beginning of period
    
    
    35,738
    
    
    
    10Cash and cash equivalents at end of period
    
    $
    2,281
    
    
    $
    14,462


See Accompanying Notes to the Condensed Consolidated Financial Statements.

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TERRA NITROGEN COMPANY, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS CAPITAL

AccumulatedLimited
    
    
    General
    
    
    Other
    
    
    TotalPartners
    
    
    Partners
    
    
    Comprehensive
    
    
    Partners(in thousands, except for Units)
    
    Interests
    
    
    Interests
    
    
    Income (loss)
    
    
    CapitalPartners capital at January 1, 2003
    
    $
    177,463
    
    
    $
    (10,248
    )
    
    $
    2,273
    
    
    $
    169,488Net loss
    
    
    (51,752
    )
    
    
    (1,056
    )
    
    
    (7,756
    )
    
    
    (52,808
    )Change in fair value of derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,756
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60,564
    )Distributions
    
    
    (4,626
    )
    
    
    (94
    )
    
    
    
    
    
    
    (4,720
    )Partners capital at September 30, 2003
    
    $
    121,085
    
    
    $
    (11,398
    )
    
    $
    (5,483
    )
    
    $
    104,204Limited
partner units issued and
outstanding at September 30, 2003
    
    
    
    
    
    
    18,501,576


AccumulatedLimited
    
    
    General
    
    
    Other
    
    
    TotalPartners
    
    
    Partners
    
    
    Comprehensive
    
    
    Partners(in thousands, except for Units)
    
    Interests
    
    
    Interest
    
    
    Income (loss)
    
    
    CapitalPartners capital at January 1, 2002
    
    $
    178,808
    
    
    $
    (10,221
    )
    
    $
    (1,087
    )
    
    $
    167,500Net income
    
    
    7,127
    
    
    
    145
    
    
    
    
    
    
    
    7,272Change in fair value of derivatives
    
    
    
    
    
    
    
    
    
    
    3,676
    
    
    
    3,676Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,948Distributions
    
    
    (3,738
    )
    
    
    (38
    )
    
    
    
    
    
    
    (3,776
    )Partners capital at September 30, 2002
    
    $
    182,197
    
    
    $
    (10,114
    )
    
    $
    2,589
    
    
    $
    174,672Limited
partner units issued and
outstanding at September 30, 2002
    
    
    
    
    
    
    18,501,576


See Accompanying Notes to the Condensed Consolidated Financial Statements.

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TERRA NITROGEN COMPANY, L.P.




Notes to Condensed Consolidated Financial Statements (Unaudited)



|1. |  | Basis of Presentation
|-- |  | ---------------------

The condensed consolidated financial statements contained herein should be read
in conjunction with the consolidated financial statements and notes thereto
contained in the Terra Nitrogen Company, L.P. (TNCLP) Annual Report on Form
10-K for the year ended December 31, 2002. TNCLP and its operating partnership
subsidiary, Terra Nitrogen, Limited Partnership (the Operating Partnership),
are referred to herein, collectively, as the Partnership.

The accompanying unaudited condensed consolidated financial statements reflect
all adjustments, which are, in the opinion of management, necessary for the
fair statement of the results for the periods presented. All of these
adjustments are of a normal and recurring nature. Results for the quarter are
not necessarily indicative of future financial results of the Partnership.

Realized gains and losses from hedging activities and premiums paid for option
contracts are deferred and recognized in the month in which the hedged
transactions closed. Swaps, options and other derivative instruments that do
not qualify for hedge accounting treatment are marked to market each accounting
period. Costs associated with settlement of natural gas purchase contracts and
costs for product shipping and handling are included in cost of sales.

Net income per limited partnership unit is computed by dividing net income,
less a 2% share allocable to the General Partner for the nine months ended
September 30, 2003 and 2002, respectively, by 18,501,576 limited partner units.
According to the Agreement of Limited Partnership of TNCLP, net income is
allocated to the General Partner and the Limited Partners in each taxable year
in the same proportion as Available Cash for such taxable year was distributed
to the General Partner and the Limited Partners. If there is no cash
distribution, net income is allocated to the Limited Partners and the General
Partner generally based on their respective ownership percentages.
Distributions of Available Cash are made 98% to the Limited Partners and 2% to
the General Partner, except that the General Partner is entitled, as an
incentive, to larger percentage interests (up to 50%) to the extent that
distributions of Available Cash exceed specified amounts.



|2. |  | Distributions to Unitholders
|-- |  | ----------------------------

The Partnership makes quarterly cash distributions to Unitholders and the
General Partner in an amount equal to 100% of its Available Cash (as defined
in the Partnership Agreement). The Partnership paid a $4.7 million cash
distribution ($0.25 per common unit) on February 7, 2003 and a $3.8 million
cash distribution ($0.20 per common unit) on August 26, 2002.

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|3. |  | Financing Arrangements
|-- |  | ----------------------

The Partnership has an arrangement for demand deposits and notes with an
affiliate to allow for excess Partnership cash to be deposited with or funds to
be borrowed from Terra Capital, Inc., the parent of the General Partner. At
September 30, 2002, $14.5 million was deposited with Terra Capital, Inc. and
earned interest at the rate received on its commingled investments.

4. Natural gas costs

Natural gas is the principal raw material used in the Partnerships production
of nitrogen products. Natural gas prices are volatile and we manage this
volatility through the use of derivative commodity instruments. The
Partnerships normal policy is to hedge 20-80% of its natural gas requirements
for the upcoming 12 months and up to 50% of the requirements for the following
24-month period, provided that such arrangements would not result in costs
greater than expected selling prices for our finished products. Deviations
from this policy are permitted by notification of Terra Industries Board of
Directors. The financial derivatives are traded in months forward and
settlement dates are scheduled to coincide with gas purchases during those
future periods. These contracts reference physical natural gas prices or
approximate NYMEX futures contract prices. Contract prices are frequently
based on prices at the most common and financially liquid location of reference
for financial derivatives related to natural gas. However, natural gas
supplies for our facilities are purchased for each plant at locations other
than reference points, which often creates a location basis differential
between the contract price and the physical price of natural gas. Accordingly,
use of financial derivatives may not exactly offset the change in the price of
physical gas.

The Partnership has entered into forward pricing contracts for a portion of its
natural gas requirements for the remainder of 2003 and 2004, consistent with
its policy. As a result of its policies, the Partnership has reduced the
potential adverse financial impact of natural gas increases during the forward
pricing period, but conversely, if natural gas prices were to fall, the
Partnership will incur higher costs. Contracts were in place at September 30,
2003 to cover 32% of natural gas requirements for the succeeding twelve months.

Unrealized losses from forward pricing positions totaled $4.2 million as of
September 30, 2003. The amount ultimately recognized by the Partnership will
be dependent on published prices in effect at the time of settlement. The
Partnership also had $1.3 million of realized losses on closed North America
contracts relating to future periods that have been deferred to the respective
period.

On September 30, 2003, the fair value of the derivatives resulted in a $2.6
million decrease in other current assets and a $5.1 million increase in current
liabilities to reclassify deferred losses on closed contracts relating to
future periods.

5. Idled facilities and impairment of long-term assets

On February 27, 2003, the Partnership suspended production of ammonia and urea
at its Blytheville, Arkansas plant and placed one of the two Verdigris,
Oklahoma ammonia plants on standby due to the high natural gas prices. On March
13, 2003, the Partnership announced the restart of production at both
facilities.

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On June 26, 2003, the Partnership suspended production at its Blytheville,
Arkansas facility due to expectations that the facility would not cover its
cash costs because of continuing high natural gas costs and the seasonal
decline in nitrogen fertilizer demand and prices. In response to this action
and as required by Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, Terra
commenced a review to determine if the Blytheville facilitys carrying value
was impaired. This review led Terra management to conclude that future market
conditions may not justify the ongoing investment in maintenance and
replacement capital necessary to extend operations for the remainder of the
facilitys useful life. Accordingly a $40.7 million charge was recorded during
the second quarter as an Impairment of long-lived assets. The Partnership
resumed production in October 2003 in response to higher urea selling prices
and improved seasonal demand. The Partnership expects production to continue
through at least April 30, 2004.

6. Recently issued accounting standards

Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations
became effective for the Partnerships fiscal year beginning January 1, 2003.
This standard requires the Partnership to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred. The
adoption of this standard did not have a material effect on the Partnerships
financial position or results of operations.

SFAS No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure amends SFAS No. 123 Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of Statement 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Partnership believes that
the adoption of this standard will not have an impact to our financial
position.

SFAS No. 149, Amendments of Statement 133 on Derivative Instruments and
Hedging Activities, amends and clarifies financial accounting for derivative
instruments. This standard becomes effective in the Partnerships third
quarter. The adoption of this standard is not expected to have a material
effect on the Partnerships financial position or results of operations.

SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity, establishes standards for how
an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were previously
classified as equity. This standard became effective for the Partnership
contracts entered into after May 31, 2003. The adoption of this standard did
not have a material effect on the Partnerships financial position or results
of operations.

FASB Interpretation (FIN) No. 45, Guarantors Accounting and Disclosure
Requirements, Including Indirect Guarantees of Indebtedness of Others,
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing certain guarantees. FIN 45 also expands the disclosure to be made by a

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guarantor in its financial statements about its obligations under certain
guarantees that it has issued. The provisions of FIN 45 are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. The
disclosure requirements of FIN 45 became effective for the Partnership in 2003.
FIN 45 did not have an impact to our financial position.

FASB Interpretation (FIN) No. 46, Consolidation of Variable Interest
Entities, explains how to identify variable interest entities and how an
enterprise assesses its interest in a variable interest entity to decide
whether to consolidate that entity. The provisions of FIN 46 applied to the
Partnership on September 15, 2003. FIN 46 did not have an impact to our
financial position.

FASB Emerging Issues Task Force (EITF) issue 02-9, Accounting for Changes
that Result in a Transferor Regaining Control of Financial Assets Sold, was
effective for the Partnership on April 2, 2003 and did not have an impact on
the Partnerships financial position.

FASB EITF issue 01-8, Determining Whether an Arrangement Contains a Lease,
was assessed and did not have an impact on the Partnerships financial
position.

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ITEM 2. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Critical Accounting Policies

The discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States
of America for interim reporting purposes. The preparation of these financial
statements requires us to make estimates and judgments that affect the amount
of assets, liabilities, revenues and expenses at the date of our financial
statements. Actual results may differ from these estimates under different
assumptions or conditions.

Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. Our critical
accounting policies are described below.

Impairments of long-lived assets We record impairment losses on long-lived
assets used in operations when events and circumstances indicate that the
assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amount of these items. Our
cash flow estimates are based on historical results adjusted to reflect our
best estimate of future market and operating conditions. The net carrying value
of assets not recoverable is reduced to fair value. Our estimates of fair value
represent our best estimate based on industry trends and reference to market
rates and transactions. The recoverability of these assets is highly dependent
upon the accuracy of certain underlying assumptions, such as future product
prices and costs. During the 2003 second quarter, events occurred that
necessitated an evaluation of recoverability of assets at our Blytheville
facility.

On June 26, 2003, we suspended production at our Blytheville facility due to
expectations that the facility would not cover its cash costs because of
continuing high natural gas costs and the seasonal decline in nitrogen
fertilizer demand and prices. In response to this action and as required by
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, Terra commenced a review to
determine if the Blytheville facilitys carrying value was impaired. This
review led Terra management to conclude that future market conditions may not
justify the ongoing investment in maintenance and replacement capital necessary
to extend operations for the remainder of the facilitys useful life.
Accordingly a $40.7 million charge was recorded during the second quarter as an
Impairment of long-lived assets. While the plants value is permanently
impaired, we resumed production in October 2003 in response to higher urea
selling prices and improved seasonal demand. The Partnership expects
production to continue through April 30, 2004. We anticipate $4.0 to $6.0
million of spending will be required when the facility is permanently idled.

Revenue recognition Revenue is recognized when title to finished product
passes to the customer. Revenue is recognized as the net amount to be received
after deducting estimated amounts for discounts and trade allowances. Revenue
includes amounts paid by customers for shipping and handling.

Inventory valuation Inventories are stated at the lower of cost or estimated
net realizable value. The average cost of inventories is determined using the
first-in, first-out method. The nitrogen industry is characterized by rapid
change in both demand and pricing. Rapid declines in demand

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could result in temporary or permanent curtailment of production, while rapid
declines in price could result in a lower of cost or market adjustment.

Three months ended September 30, 2003 compared with
three months ended September 30, 2002

Volumes and prices for the three-month periods ended September 30, 2003 and
2002 follow:

2003
    
    
    2002Volumes
    
    
    Unit Price
    
    
    Volumes
    
    
    Unit Price(000 tons)
    
    
    ($/ton)*
    
    
    (000 tons)
    
    
    ($/ton)*Ammonia
    
    
    72
    
    
    $
    232
    
    
    
    83
    
    
    $
    138UAN
    
    
    571
    
    
    
    96
    
    
    
    594
    
    
    
    70Urea
    
    
    32
    
    
    
    171
    
    
    
    100
    
    
    
    122


*After deducting outbound freight costs

Revenues for the quarter ended September 30, 2003 increased $10.3 million, or
13.5%, compared with the same quarter in 2002 as the result of higher sales
prices partly offset by lower sales volumes. Lower nitrogen supplies and
higher natural gas costs were the primary factor causing the increased prices
as compared to the 2002 third quarter. Third quarter 2003 sales volumes,
particularly for urea, were affected by a decision to suspend production at the
Blytheville facility due to expectations that the facility would not cover its
cash costs because of continuing high natural gas costs and the seasonal
decline in nitrogen fertilizer demand and prices.

Third quarter gross profits declined $3.0 million from 2002. Higher 2003 sales
prices contributed $23 million to gross profits, but were more than offset by
increased natural gas costs and $3.2 million of idle plant costs at
Blytheville. Third quarter natural gas costs increased 73%, or $22 million, as
unit costs increased from $2.96/MMBtu in 2002 to $5.11/MMBtu in 2003 (net of
forward pricing gains or losses). As a result of forward price contracts,
third quarter 2003 natural gas costs for the Partnership were $1.7 million
higher than spot prices.

Operating expenses were essentially unchanged in 2003 from 2002. Net interest
income/expense was $.2 million higher than the 2002 third quarter due to lower
cash balances and higher short-term borrowings during the 2003 third quarter.

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Nine months ended September 30, 2003 compared with
nine months ended September 30, 2002

Volumes and prices for the nine-month periods ended September 30, 2003 and 2002 follow:

2003
    
    
    2002Volumes
    
    
    Unit Price
    
    
    Volumes
    
    
    Unit Price(000 tons)
    
    
    ($/ton)*
    
    
    (000 tons)
    
    
    ($/ton)*Ammonia
    
    
    204
    
    
    $
    237
    
    
    
    287
    
    
    $
    147UAN
    
    
    1,647
    
    
    
    96
    
    
    
    1,839
    
    
    
    69Urea
    
    
    269
    
    
    
    164
    
    
    
    342
    
    
    
    113


*After deducting outbound freight costs

Revenues for the nine months ended September 30, 2003 increased $37.1 million,
or 15.5%, compared with the same period in 2002 as the result of higher prices
partly offset by lower sales volumes. Sales prices were higher as the result
of decreased supplies of nitrogen fertilizer caused by high natural gas costs
that resulted in industry-wide production curtailments. Sales volumes in 2003
were lower than previous year due to curtailments of Partnership production
including a decision to suspend production on June 26, 2003 at the Blytheville
facility due to expectations that the facility would not cover its cash costs
because of continuing high natural gas costs and the seasonal decline in
nitrogen fertilizer demand and prices.

Gross profits during the 2003 first nine months declined $19.8 million from
2002. Higher 2003 sales priced contributed $76 million to gross profits, but
were more than offset by higher natural gas costs, lower sales volumes and idle
plant costs. First nine months the cost of natural gas purchases increased $84
million, or 83%, over the 2002 period as unit costs, net of forward pricing
gains and losses, increased to $5.30/MMBtu during the 2003 first nine months
compared to $2.89/MMBtu during the same 2002 period (net of forward pricing
gains or losses). Natural gas costs in the 2003 first nine months were $2.2
million lower than spot prices as the result of forward price contracts.

Operating expenses and net interest expenses were essentially unchanged in 2003
from 2002.

On June 26, 2003, we suspended production at our Blytheville facility due to
expectations that the facility would not cover its cash costs because of
continuing high natural gas costs and the seasonal decline in nitrogen
fertilizer demand and prices. In response to this action and as required by
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, a $40.7 million charge was
recorded during the second quarter as discussed more fully above under
Critical Accounting Policies.

Capital resources and liquidity

Net cash used in operations for the first nine months of 2003 was $25.7 million
composed of $2.9 million of cash used for operating activities and $22.8
million used to fund working capital needs. Working capital needs consisted
primarily of declines in accounts payable, accrued liabilities and customer
prepayment balances since December 31, 2002.

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Capital expenditures of $1.8 million during the first nine months of 2003 were
primarily to fund replacement and stay-in-business additions to plant and
equipment. The Partnership expects 2003 capital expenditures to approximate
$3.0 million to fund replacement and stay-in-business additions to plant and
equipment.

The Partnership makes quarterly cash distributions to Unitholders and the
General Partner in an amount equal to 100% of its Available Cash (as defined
in the Partnership Agreement). The Partnership paid a $4.7 million cash
distribution ($0.25 per common unit) on February 7, 2003 and a $3.8 million
cash distribution ($0.20 per common unit) on August 26, 2002.

The Partnership, along with Terra Industries Inc. (Terra), Terra Capital,
Inc. and other affiliates, has a revolving credit facility that expires in
September 2005. Borrowing availability under the credit facility is generally
based on eligible cash balances, 85% of eligible accounts receivable and 65% of
eligible finished goods inventory, less outstanding letters of credit. At
September 30, 2003, the Partnership had no outstanding revolving credit
borrowings or outstanding letters of credit, resulting in remaining borrowing
availability of approximately $22.2 million under the facility. Management
expects the facility to be adequate to meet the Partnerships operating cash
needs. The credit facility also requires that the Partnership adhere to certain
limitations on additional debt, capital expenditures, acquisitions, liens,
asset sales, investments, prepayments of subordinated indebtedness, changes in
lines of business and transactions with affiliates. In addition, if Terras
borrowing availability falls below $60 million, Terra is required to have
generated $60 million of operating cash flows, or earnings before interest,
income taxes, depreciation, amortization and other non-cash items (as defined
in the credit facility) for the preceding four quarters. The amount of
operating cash flows to measure credit facility compliance is different than
amounts that can be derived from Terras financial statements. For the 12
months ended September 30, 2003, Terras operating cash flows as defined in the
credit facility was $80 million. Terra is also required to maintain a minimum
unused borrowing availability of $30 million at all times. At September 30,
2003, its remaining borrowing availability under the facility was approximately
$102.0 million.

The Partnerships principal needs for funds are for support of its working
capital and capital expenditures. The Partnership intends to fund its needs
primarily from net cash provided by operating activities, and, to the extent
required, from funds borrowed from others, including borrowings from Terra
Capital, Inc., the parent of the General Partner.

Terras ability to meet its bank covenants will depend on future operating cash
flows, working capital needs, receipt of customer prepayments and trade credit
terms. Failure to meet these covenants could require additional costs and fees
to amend the bank facilities or could result in termination of the
Partnerships bank facilities. Access to adequate bank facilities is critical
to funding our operating cash needs. Terra currently anticipates that it will
be able to meet its covenants through 2004. Nevertheless, if there were to be
any adverse changes in the factors discussed above, Terra might need a waiver
of its bank covenants and there is no assurance Terra could obtain such
waivers.

The General Partners ability to manage the Partnerships exposure to commodity
price risk in the purchase of natural gas through the use of financial
derivatives may be affected by limitations imposed by Terras bank agreement
covenants.

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Limited Call Right

At September 30, 2003, the General Partner and its affiliates owned 75.1% of
the Partnerships outstanding units. When less than 25% of the issued and
outstanding units are held by non-affiliates of the General Partner, the
Partnership, at the General Partners sole discretion, may call, or assign to
the General Partner or its affiliates, its right to acquire all such
outstanding units held by non-affiliated persons. If the General Partner
elects to acquire all outstanding units, the Partnership is required to give at
least 30 but not more than 60 days notice of its decision to purchase the
outstanding units. The purchase price per unit will be the greater of 1) the
average of the previous 20 trading days closing prices as of the date five
days before the purchase is announced and 2) the highest price paid by the
General Partner of any of its affiliates for any unit within the 90 days
preceding the date the purchase is announced. Additional purchases of common
units by the General Partner are restricted under the terms of Terras bank
credit agreement as described therein.

FORWARD LOOKING PRECAUTIONS

Information contained in this report, other than historical information, may be
considered forward looking. Forward looking information reflects Managements
current views of future events and financial performance that involve a number
of risks and uncertainties. The factors that could cause actual results to
differ materially include, but are not limited to the following: Changes in the
financial markets, general economic conditions within the agricultural
industry, competitive factors and price changes (principally, sales prices of
nitrogen products and natural gas costs), changes in product mix, changes in
the seasonality of demand patterns, changes in weather conditions, changes in
agricultural regulations, and other risks detailed in the Partnerships
Securities and Exchange Commission filings, in particular the Factors that
Affect Operating Results section of its most recent Form 10-K.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Partnerships operations are significantly affected by the price of natural
gas. It employs derivative commodity instruments related to a portion of its
natural gas requirements (primarily futures, swaps and options) for the purpose
of managing exposure to commodity price risk in the purchase of natural gas.
Changes in the market value of these derivative instruments have a high
correlation to changes in the spot price of natural gas. For more information
about how the Partnership manages specific risk exposures, refer to its most
recent Annual Report on Form 10-K (which is on file with the Securities and
Exchange Commission), Item 7A Quantitative and Qualitative Disclosures about
Market Risk and Note 13  Derivative Financial Instruments contained in Item
8.

The volume of natural gas hedged varies from time to time based on managements
judgment of market conditions, particularly natural gas prices and prices for
nitrogen products and methanol. Contracts were in place at September 30, 2003
to cover 32% of its natural gas requirements for the succeeding twelve months
(see Note 4). The General Partners ability to manage the Partnerships
exposure to commodity price risk in the purchase of natural gas through the use
of financial derivatives may be affected by limitations imposed by Terras bank
agreement covenants.

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ITEM 4. CONTROLS AND PROCEDURES

Our Chief Executive Officer and Chief Financial Officer have concluded, based
on their evaluation as of the end of the period covered by this report, that
our disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commissions rules and forms.

There were no changes in our internal control over financial reporting that
occurred during our most recent fiscal quarter that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.

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PART II. OTHER INFORMATION




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)
    
    Exhibits:Exhibit 31.1
    
    Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 31.2
    
    Certification of the Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002Exhibit 32
    
    Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002


(b)
    
    Reports on Form 8-K:Form 8-K dated July 31, 2003 announcing second quarter resultsForm 8-K dated September 17, 2003 announcing plans to restart the
Blytheville facility





SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

TERRA NITROGEN COMPANY, L.P.By:
    
    TERRA NITROGEN CORPORATION
as General PartnerBy:
    
    /s/ Francis G. MeyerFrancis G. Meyer
Vice President
(Principal Accounting Officer)Date: October 31, 2003


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